Zenotech Laboratories

Your Directors present the report on the business and operations of the
 Company for the year ended March 31st, 2006.
 
 FINANCIAL HIGHLIGHTS
 
                                                      For the year ended
                                                                Rs lakhs
                                                 2006               2005
 
 Sales                                       1,319.62             562.27
 
 Otherlncome                                     8.88              28.62
 
 Gross profit before interest and depreciation 121.51              66.50
 
 Interest                                       52.76              21.26
 
 Depreciation                                   25.89               5.89
 
 Amortisation of goodwill and
 miscellaneous expenses                         97.31             161.72
 
 Extra-ordinary Items-provision for doubtful
 debt and write off of investment                   -             257.34
 
 Profit/(loss) before tax                     (54.45)           (379.72)
 
 Provision for tax (including deferred taxes)   19.36              25.90
 
 Profit/(loss) after tax                      (73.80)           (408.63)
 
 Loss brought forward from previous year     (435.88)            (27.25)
 
 Loss brought forward from
 M/s. Credence Pharmaceuticals Limited and
 M/s. Hemarus HealtMcare Private Limited      (78.87)                  -
 
 Profit/(loss) carried forword
 to balance sheet                            (588.56)           (435.88)
 
 SCHEME OF AMALGAMATION
 
 During the year, the Company has, pursuant to the provisions of Section
 391 to 394 of the Companies Act, 1956 and with the approvals of the
 shareholders and secured creditors, entered into a Scheme of
 Amalgamation with M/s, Credence Pharmaceuticals Limited and M/s,
 Hemarus Healthcare Private Limited. The Honble High Court of Andhra
 Pradesh at Hyderabad has sanctioned the Scheme of Amalgamation with
 effect from October 1st 2005 through its order dated May 2nd, 2006, The
 certified copies of the orders of the Honble High Court were filed
 with the Registrar of Companies, Andhra Pradesh on May 25th, 2006,
 Hence, the consolidated accounts of M/s, Zenotech Laboratories Limited,
 M/s. Credence Pharmaceuticals Limited and M/s. Hemarus Healthcare
 Private Limited have been prepared for the year ended as on March 31st,
 2006.
 
 CONSOLIDATED FINANCIAL STATEMENTS
 
 In accordance with the Accounting Standard AS-21 on Consolidated
 Financial Statements read with Accounting Standard AS-23 on Accounting
 for Investments in Associates, your Directors provide the un-audited
 Consolidated Financial Statements in the annual report,
 
 SHARE CAPITAL
 
 During the financial year 2005-06, the Company has allotted 7,50,000
 equity shares (3,00,000 equity shares on April 9th, 2005, 2,00,000
 equity shares on May 23rd, 2005 and 2,50,000 equity shares on August
 31st, 2005) of Rs. 10/- each per share upon exercise of the conversion
 option of 7,50,000 convertible warrants by the allottee, Dr. Jayaram
 Chigurupati, Chairman and Managing Director, issued on a preferential
 basis, at a price (including premium) of Rs. 55/- each
 
 In line with the scheme of amalgamation between M/s. Credence
 Pharmaceuticals Limited and M/s Hemarus Healthcare Private Limited with
 the Company approved by the Honble High Court of Andhra Pradesh at
 Hyderabad on May 2nd, 2006, the Company has issued 1,11,27,664 equity
 shares to the erstwhile shareholders of M/s. Credence Pharmaceuticals
 Limited and M/s. Hemarus Healthcare Private Limited on July 17th, 2006
 in the ratio of 2:3 and 51:10, respectively However, as on March 31st,
 2006 the company has created a share suspense account to the extent of
 Rs. 1,112.77 lakhs.
 
 EMPLOYEE STOCK OPTION SCHEME (ESOS)
 
 The Company has introduced stock option plan for the employees.
 However, no Options were granted under the Zenotechs Employee Stock
 Option Plan for the year ended as on March 31st, 2006, Hence, the
 disclosures pursuant to the provisions of Guideline 12 of the
 Securities and Exchange Board of India (Employee Stock Option Scheme
 and Employee Stock Purchase Scheme), Guidelines, 1999 are not provided.
 
 DELISTING
 
 The Companys equity shares were delisted from the Hyderabad Stock
 Exchange Limited (HSE) with effect from April 12th, 2006. The Company
 has also placed its delisting application from the Calcutta Stock
 Exchange Association Limited (CSE) The Companys equity shares continue
 to remain listed on the Bombay Stock Exchange Limited (BSE)
 
 CORPORATE GOVERNANCE AND ADDITIONAL INFORMATION TO SHAREHOLDERS
 
 Your Company has complied with all the mandatory recommendations of the
 Narayana Murthy Committee on Corporate Governance constituted by the
 Securities and Exchange Board of India (SEBI). A detailed report on
 Corporate Governance system and practices of the Company are given in a
 separate section in this annual report. Detailed information for the
 shareholders is given in Additional Shareholders Information section.
 
 MANAGEMENT DISCUSSION AND ANALYSIS
 
 A detailed Management Discussion and Analysis section is provided in
 this annual report.
 
 SUBSIDIARY COMPANIES
 
 1. The Company has a wholly owned subsidiary company, Zenotech
 Farmaceutica Do Brasil Limitada (ZFDBL), Brazil. The Company was
 acquired in January 2005. The Company has received ANVISA approval for
 its warehouse facility in Brazil. ZLL has since filed product dossiers
 with ANVISA. Further regulatory approvals are to be received before
 commencement of commercial business. However, for the financial year
 the company has consolidated the financials in accordance with the
 IGAAP
 
 2. The Company has a wholly owned subsidiary company, Zenotech
 Laboratories Nigeria Limited (ZLNL), Nigeria. The Company was
 established in August 2005. The Company is awaiting regulatory
 clearances for its product range to commence commercial business.
 However, for the financial year the company has consolidated the
 financials in accordance with the IGAAP.
 
 3. The Company has a wholly owned subsidiary company Zenotech Inc.,
 New Jersey USA which was the wholly owned subsidiary of erstwhile M/s.
 Hemarus Healthcare Private Limited. For the financial year the Company
 has consolidated the financials in accordance with the IGAAP
 
 RESPONSIBILITY STATEMENT OF THE BOARD OF DIRECTORS
 
 In compliance of Section 217 (2AA) of the Companies Act, 1956, the
 Board submits as under:
 
 * in the preparation of the annual accounts, the applicable accounting
 standards had been followed along with proper explanation relating to
 material departures;
 
 * the Directors had selected such accounting policies and applied them
 consistently and made judgments and estimates that are reasonable and
 prudent so as to give a true and fair view of the state of affairs of
 the Company at the end of the financial year and of the profit or loss
 of the Company for that period;
 
 * the Directors had taken proper and sufficient care for the
 maintenance of adequate accounting records in accordance with the
 provisions of the Act for safeguarding the assets of the Company and
 for preventing and detecting fraud and other irregularities;
 
 * the Directors had prepared the annual accounts on a going concern
 basis.
 
 DEPOSITS
 
 The Company has not accepted any deposit under Section 58A of the
 Companies Act, 1956 during the year under review.
 
 DIRECTORS
 
 Dr. Denis Broun and Prof. Vithala R. Rao retire by rotation at the 17th
 Annual General Meeting and they being eligible offers themselves for
 re-appointment.
 
 We inducted Mr. M.R. Vikram as an additional director of the Company on
 November 29th, 2005, He is an Independent Non-Executive Director As
 per the provisions of Section 260 of the Companies Act, 1956, Mr.
 Vikram holds office only up to the date of the ensuing Annual General
 Meeting of the Company The Company has received notice under Section
 257 of the Act, proposing his appointment as a Director of the Company,
 liable to retire by rotation, along with the requisite deposit.
 Resolution seeking approval of the shareholders for his appointment has
 been incorporated in the Notice convening the forthcoming Annual
 General Meeting along with his brief details.
 
 AUDITORS
 
 M/s. Ganeshvenkat & Co., (formerly M/s. Rajavenkat & Associates),
 Chartered Accountants, Statutory Auditors of your Company hold office
 until the conclusion of the ensuing Annual General Meeting. They have
 shown their inability to be re-appointed as the Statutory Auditors,
 Therefore, the Board of Directors has proposed the appointment of M/s.
 Deloitte Haskins & Sells, Chartered Accountants, as the Statutory
 Auditors. The Company has received a certificate from them to the
 effect that their appointment, if made, would be within the limits
 prescribed under Section 224(1) of the Companies Act, 1956.
 
 PARTICULARS OF EMPLOYEES
 
 During the year under review, none of the employees of the Company have
 drawn remuneration as specified under Section 217(2A) of the Companies
 Act, 1956 read with the Companies (Particulars of Employees) Rules,
 1975.
 
 ENERGY CONSERVATION, RESEARCH AND DEVELOPMENTS, TECHNOLOGY ABSORPTION,
 FOREIGN EXCHANGE EARNINGS AND OUTGO
 
 The particulars relating to energy conservation, research and
 development, technology absorption, foreign exchange earnings and
 outgo, as required to be disclosed under Section 217(1)(e) of the
 Companies Act, 1956 read with Companies (Disclosure of Particulars in
 the Report of Board of Directors) Rules, 1988 are provided in the
 Annexure to this report.
 
 ACKNOWLEDGMENT
 
 The Board of Directors would like to express their grateful
 appreciation for the assistance and co-operation received from the
 Financial Institutions and Banks like Andhra Pradesh State Financial
 Corporation (APSFC), Technology Development Board (TDB), Andhra Bank,
 Indian Overseas Bank (IOB), UTI Bank and other banks, Government
 Authorities, Customers, Vendors and Members during the year under
 review,
 
 Yours Directors also wish to place on record the sincere efforts and
 committed services put in by the employees at all levels. Our growth
 was made possible by their hard work, solidarity cooperation and
 support.
 
                                          tor and on behalf of the Board
 Place: Hyderabad                                Dr. Jayaram Chigurupati
 Date: August 27th, 2006                  Chairman and Managing Director
 
 FORM B
 
 Research and Development
 
 1. Specific areas in which R&D carried out by the Company Generic Bio
 Pharmaceuticals
 
 The biotech R&D department has teams working in different areas of
 product, process and formulations development, all working in synchrony
 to take a biological drug product from start to commercial launch. The
 four main areas of work are generic biologicals (therapeutic proteins
 and monoclonal antibodies), generic formulations and drug delivery
 systems, generic peptide drugs and new therapeutic humanized monoclonal
 antibodies,
 
 During the year, the generic biologicals group mainly focused on the
 process scale-up and validation activities required for launching G-CSF
 (Nugraf™) and GM-CSF (MacrogenTM) commercially The activities required
 for scaling up the fermentation and purification processes at 100L
 scale, including qualification of processes and equipments were
 undertaken. Purified recombinant human Growth Hormone and Rituximab
 were manufactured and sent to Pune for conducting pre-clinical animal
 toxicology studies. Both these products showed no adverse reactions or
 toxicology on completion of animal studies, The human clinical trial
 for generic lnterleukin-2 was initiated and is now nearing completion.
 This product is likely to be commercialized by the end of the year,
 generic rituximab (Zenotechs first generic monoclonal antibody) is
 currently awaiting regulatory approval for phase III human clinical
 trials. A few more generic monoclonal antibodies are under development
 including transtuzumab, which has moved from the product development
 stage to pre-clinical testing approval stage.
 
 The protein formulations group, besides developing a generic PEGylated
 G-CSF (similar to Neulasta, Amgen) also developed a novel PEGylated
 G-CSF, the patent for which is being filed with the Indian patent
 office.
 
 A new area of generic oncology peptides was initiated during the year
 by putting in place the infrastructural requirements for synthesizing
 and characterizing peptide drugs.
 
 In the area of new drugs, two new humanized monoclonal antibodies are
 being developed and are likely to enter the regulatory pathway in a
 couple of months time.
 
 Small Volume Parenterals
 
 The synthetic API R&D division develops cost-effective processes for
 manufacture of generic drug molecules. The processes for synthesis of
 two molecules, Gemcitabine hydrochloride, a chemotherapy drug and
 Zoledronic acid, used in hypercalcemia of malignancy, are now in use
 tor regular production batches. The processes for a few chemotherapy
 drugs like Docetaxel and Paclitaxel are at the scale-up stage of
 development, which is likely to be followed by several other
 chemotherapy molecules like Irinotecan, Oxaliplatin, and Topotecan.
 These achievements are due to the efforts of a team of fifteen
 qualified and experienced personnel. They operate in a 6,500 sq.ft.
 area of a state-of-the-art facility equipped with the reactors, fume
 hoods, rotary evaporators and pumps for conducting multi-stage
 reactions.
 
 The process development activity does not stop with the development of
 a process for API bulk production. The formulation development team
 takes on where the bulk team leaves of, coping with the challenges of
 freeze drying and drug delivery (PEGylation, liposomal and depot
 formulations). This team has been instrumental in developing new or
 improved processes for formulation of several molecules in oncology and
 anesthesiology, for in-house and outside customers
 
 A highlight has been the method to manufacture multi-dose formulation
 of propofol-the first of its kind in India. Among several other
 challenging projects taken up by the team, a few of them deserve
 special mention; the formulation development tor L-asparaginase and a
 new process for the manufacture of epirubicin and bleomycin are among
 them. Several process improvements instituted by the team has helped in
 quality improvements of products like gemcitabine and zoledronic acid
 injections. In one way or the other, the team has been responsible for
 the launch of the entire anesthesiology range of products at Zenotech.
 
 In addition to the cytotoxic and anesthesiology products, Zenotech has
 developed several products in other therapy areas as well. These
 products are listed in the table below and have again been the outcome
 of the superior efforts of the formulations development team.
 
 2. Benefits derived as a result of the R&D
 
 The commercial launch of two generic recombinant protein drugs G-CSF
 (Nugraf™) and GM-CSF (Macrogen™), for use by oncologists to treat
 chemotherapy-induced neutropenia, was possible because of the product
 and process development activities carried out by the R&D team. Besides
 these two drugs, lnterleukin-2, a therapeutic used in the treatment of
 renal cell carcinoma and Growth Hormone used for pediatric growth
 deficiency were also developed by the in-house R&D team Development of
 a novel category of generic biologicals, the monoclonal antibodies, was
 initiated two years back and the first generic monoclonal antibody
 developed (Rituximab) could complete pre-clinical toxicology studies,
 The team that has several other monoclonal antibodies in the pipeline
 for development, will soon deliver a second monoclonal antibody for
 pre-clinical toxicology studies. The product and process development
 activities for several generic biological molecules have been the
 highlight of the achievements by the in-house R&D team. There have been
 other achievements as well that cannot be disregarded, like the method
 for novel pegylation of G-CSF and the initiation of new areas of work
 in generic oncology peptides and novel humanized monoclonal antibodies.
 All these activities are certain to not only provide a steady supply of
 drugs in the pipeline, but also establish different technology
 platforms within the R&D, that can be of immense value in future to the
 Company
 
 3. Future plan of action
 
 The Company is committed to developing generic biologicals and other
 speciality injectables in oncology, neurology and endocrinology Besides
 developing generic recombinant proteins and monoclonal antibodies, it
 also plans to foray into the area of new drugs, mainly new humanized
 monoclonal antibodies. Developing generic and new formulations and drug
 delivery systems are also being considered with great interest, since
 this technology has immense potential to add value during
 commercialization of peptide drugs. The company is actively developing
 several speciality injectables for the US and EU markets. The company
 will start filing ANDAs for these products in the next few months.
 
 4. Expenditure on R&D                                         Rs. lakhs
 
 a. Captal                                                          4.77
 
 b. Recurring                                                     213.71
 
 c. Total                                                         218.48
 
 d. Total as percentage  of turnover                              16.56%
 
 Technology absorption, adoption and innovation
 
 The technologies handled by the R&D team so far were developed
 completely in-house, with no collaborations or technology transfers
 from outside parties
 
 Among the four patents filed so far, two of them have already been
 submitted for filing with the WIPO-PCT A fifth patent is in the
 process of being filed with the Indian patent office this year.
 
 C. Foreign Exchange Earnings and Outgo Total foreign exchange used and
 earned:
 
                                                               Rs. lakhs
 
 i) Foreign Exchange earnings                                     118.46
 
 ii) Foreign Exchznge outgo (including raw materils components and spare
 parts of 1,88.18 capital goods, investments and other expenditures in
 foreign currency including dividends)
 
                                          for and on behalf of the Board
 Place; Hyderabad                                Dr. Jayaram Chigurupati
 Date; August 27th, 2006                  Chairman and Managing Director